CONFIDENTIAL
002376
MDLIAN 1494
REVERT TO THE IBRD MANAGEMENT REQUESTING A RECONSIDERATION OF THEIR DECISION, DEPLOYING AS APPROPRIATE THE FOLLOWING ARGUMENTS:
(A) UNIQUE SITUATION OF HONG KONG: HKSAR WOULD DECIDE ITS OWN ECONOMIC, MONETARY AND FINANCIAL POLICIES: HK DOLLAR TO BE HK'S ONLY LOCAL LEGAL TENDER (AS DISTINCT FROM RMB) WHICH WOULD REMAIN FULLY CONVERTIBLE: NO EXCHANGE CONTROL: AND FREE FLOW OF CAPITAL WITHIN, INTO AND OUT OF THE HKSAR. (JD94-104 SEE ALSO SMA'S LETTER DATED 7 AUGUST 1991 TO RADIFERA.)
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(B) CREDIT RATING AGENCIES ALSO RECOGNISE THAT HK'S ECONOMY IS DIFFERENT AND DISTINCT FROM CHINA BEYOND 1997. MOODY'S RATING OF LONG-TERM HONG KONG DEBT (MATURING AFTER 1997) IS 'A3', ONE NOTCH ABOVE CHINA'S LONG-TERM RATING OF 'BAA1' S AND P'S LONG-TERM RATING FOR HONG KONG IS 'A', THREE NOTCHES ABOVE CHINA'S RATING OF 'BBB'. JAPAN BOND RESEARCH INSTITUTE RATES MTRC'S LONG-TERM SAMURAI BOND TO BE 'AA', ONE NOTCH ABOVE THE 'AA-' RATING OF BANK OF CHINA.
(C) MULTILATERAL AGENCIES LIKE THE ASIAN DEVELOPMENT BANK AND ANOTHER MEMBER OF THE WORLD BANK GROUP (THE INTERNATIONAL FINANCE CORPORATION) ALSO RECOGNISE THE DISTINCTION AND HAVE ISSUED BONDS IN HONG KONG MATURING AFTER 1997. SUCH INITIATIVES WERE WARMLY ACCEPTED BY CHINA AND THE MARKET REACTED VERY POSITIVELY TO THE ISSUES. THESE AGENCIES ARE ALREADY PLANNING FURTHER ISSUES IN HONG KONG. EUROPEAN INVESTMENT BANK IS ALSO CONTEMPLATING BOND ISSUES IN HONG KONG.
(D) THE FURTHER DEVELOPMENT OF HONG KONG'S CAPITAL MARKETS WOULD BENEFIT NOT ONLY HONG KONG BUT ALSO ECONOMIC DEVELOPMENT IN CHINA, AS WE FIND AN INCREASING TREND OF CHINESE ENTERPRISES COMING TO HONG KONG TO RAISE CAPITAL AND FUNDS.
(E) TO TREAT HONG KONG DIFFERENTLY UNDER THIS POLICY WOULD NOT CREATE A PRECEDENT FOR OTHER LDCS, AS NONE OF THEM WOULD BE IN A POSITION COMPARABLE TO THE 'ONE COUNTRY, TWO SYSTEMS' ARRANGEMENTS FOR HONG KONG AFTER 1997.
5. UKREP JLG CONCURS.
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CONFIDENTIAL
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